Waddell & Reed Financial Inc. WDR reported second-quarter 2016 adjusted earnings of 59 cents per share, surpassing the Zacks Consensus Estimate of 48 cents. However, it compared unfavorably with the prior-year quarter earnings of 80 cents (non-recurring items were absent during the quarter).
Better-than-expected results were primarily driven by lower expenses. However, a decline in revenues, elevated outflows and deteriorating assets under management (AUM) were the undermining factors. These reasons perhaps led to a 1.6% decline in the company’s share price, following the announcement of the results.
The results excluded $24.1 million in charges related to severance, accelerated amortization of deferred acquisition costs and Project E implementation costs. After considering these, net income totaled $33.7 million, down 50% year over year.
Revenues, Expenses & AUM Witness a Decline
Operating revenues fell 19% year over year to $319.2 million, reflecting a decline in all components. However, it surpassed the Zacks Consensus Estimate of $315.3 million.
Gross sales declined 51.5% year over year to $2.8 billion. Redemptions rose 83.8% year over year to $12.6 billion. Further, net outflows were $9.8 billion at the quarter end, up significantly from $1.1 billion in the prior-year quarter.
Operating expenses fell 6.2% year over year to $265.4 million. All expense components, except depreciation and compensation & related costs, declined.
Operating margin was 16.8%, down from 28.2% a year ago.
As of Jun 30, 2016, AUM totaled $86.5 billion, down 28.4% from Jun 30, 2015 level. A rise in net outflows and unfavorable market action were responsible for the decline.
As of Jun 30, 2016, the company’s cash and cash equivalents as well as investment securities totaled $829.1 million. Moreover, long-term debt totaled $189.5 million and stockholders’ equity was recorded at $817.5 million.
Deteriorating Performance of the Distribution Channels
At Retail Broker-Dealer (previously referred as “Advisors” channel), gross sales decreased 18.8% year over year to $1.1 billion. Net outflows totaled $398 million, up drastically from the year-ago figure of $76 million.
At Retail Unaffiliated Distribution (previously referred to as "Wholesale” channel), gross sales declined 52.9% year over year to $1.5 billion. Net outflows amounted to $3.9 billion, considerably up year over year.
Gross sales at the Institutional channel were $190 million, declining 84.2% from the year-ago quarter. Moreover, the segment witnessed net outflows of $5.5 billion, as against net inflow of $200 million in the prior-year quarter.
Share Repurchase
In the reported quarter, Waddell & Reed bought back 1.1 billion shares for $21.9 million. Overall, the company returned $60.4 million to its shareholders in the form of dividends and share repurchases during the quarter.
Our View
Waddell & Reed’s strained top line raises concerns about its prospects. Despite the company’s cost cutting initiatives, the magnitude of net outflows and weakness in fund performance continue to make investors wary. Also, a rise in redemption rates, increasing competition and unfavorable market conditions are anticipated to trouble its financials in the near term.
WADDELL&REED -A Price, Consensus and EPS Surprise
WADDELL&REED -A Price, Consensus and EPS Surprise | WADDELL&REED -A Quote
Currently, Waddell & Reed has a Zacks Rank #5 (Strong Sell).
Other Investment Managers
BlackRock, Inc. BLK reported second-quarter 2016 adjusted earnings of $4.78 per share, which lagged the Zacks Consensus Estimate by a penny. Earnings were lower-than-expected primarily due to a decline in adjusted operating income. However, efficient cost containment was on the positive side. Moreover, AUM experienced a year-over-year rise during the quarter.
The Blackstone Group L.P. BX reported second-quarter 2016 economic net income of 44 cents per share, which surpassed the Zacks Consensus Estimate of 40 cents. Results were attributable to a significant decline in expenses and higher total investment income, partially offset by lower performance fees. Also, growth in assets under management continued to be impressive.
Affiliated Managers Group Inc. AMG is scheduled to report second-quarter 2016 earnings results on Aug 1.
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